The job costing system
Employers in Australia are faced with high costs of labor and declining productivity that might lessen the lasting profitability of their businesses. In response to this scenario, some employers have resorted to increasing the prices of their products and services to manage the expenses and save on superfluous hires (Keen 2013). Nonetheless, this approach has proved ineffective and, thus, the need to utilize managerial accounting systems. The adoption of a management accounting system in a company is crucial because of its focus on every accounting that aims at providing information to management regarding the operational metrics of a business. Additionally, it makes use of data that relates to the costs of services or commodities that business purchases. Also noteworthy is that budgets are usually utilized to quantify decisions that management makes concerning operational planning (Anta & Iacob 2013). Thus, the management accounting system enables accountants to apply performance reports to spot differences between budgets and the actual outcomes. This paper mainly assesses job costing as a costing system and its relevance in decision-making to attain business objectives.
Part A: Job Costing
Features of Job Costing SystemJob costing is usually utilized by companies that produce heterogeneous items. Such companies tend to use this system because of its ability to trace costs through a job cost sheet. It means that every item’s cost is determined by assessing overhead costs, direct labor, and direct materials that can exclusively be traced to the task (Hunton 2017). As such, the job costing system considers a comprehensive breakdown of expenses for an initiative of any form. The system is also concerned with accumulating expenses by definite orders, contracts, and jobs. It also suits a company that produces identifiable products or produced as per the specifications of clients. Job costing also entails lots of bookkeeping and necessary for space contracting and specialized defense work. As such, the system is appropriate in cases where clients pay for definite commodities, service based on costs, and manufacturing order (Anta & Iacob 2013). Notably, the costing system is mostly applicable in companies that deal with custom manufacturing like professional services, printing, car repair, construction, and aircraft.
- How Job Costing Suits Australian Firms, Clayton Utz and CPB Contractors Pty Ltd
Clayton Utz is a law firm in Australia with more than 1,250 support and legal personnel, and about 163 associates in all the country’s commercial hubs (LexMundi 2020). Its growth is based on its approach to complex litigation and transaction, with exemplary dedication to offering clients professional services. It is also a trusted consultant to the leading international and local companies, and several government agencies and departments. Additionally, being a self-governing law firm in Australia, it has the suppleness to work with developed law firms in any country globally. This means that the company also has lots of clients across the globe.
Markedly, this law firm comprises of lawyers who work with varied customers on individual accounts. With this in mind, applying the job costing system will help the lawyers track the resources and amount of time used for all the clients. Of significant to note is that lawyers charge clients per hour. This hourly rate is rooted in the same manner in which overheads, direct labour, and direct materials are assessed (Anta & Iacob 2013). Most of the rates that a law firm charges signify the costs paid as salaries to lawyers. Nonetheless, the direct material that a law firm utilizes is usually negligible. Such is because lawyers utilize low-cost materials like paper and binders. The materials are usually referred to as supplies and are included in overhead. Additionally, regarding overheads, the amount of money that a firm spends in maintaining the office and other facilities are shared among customers based on an approximated overhead (Anta & Iacob 2013).
Additionally, CPB Contractors Pty Ltd is a construction company that provides infrastructure and engineering services. It offers services for marine, ports, airports, water, rail, roads, and energy, as well as gas and oil sectors (Bloomberg 2020). Reliance on the job costing system is crucial to the firm because of its need to assess the contracts it gets in detail, break them down into specific materials and labour requirements, and calculate the costs. After that, it is necessary to add charges that will cover the overheads. Below are the detailed costs that the company, just like any other construction firm, considers.
Labour
The company computes the hourly or daily costs to have direct employees perform their tasks. This computation helps the company to determine the expenses it will incur to have the task completed. The system also helps identify where the company requires subcontractors at the appropriate time and then recruits them. The company will then be in a position to calculate the amount to be paid to the subcontractors anchored in their hourly rate (Kern & Formoso 2006).
Material
The job costing system is reliable in computing the cost of direct materials such as electrical wiring, steel, wood, sand, caulking, fasteners, equipment hire, and cement. The system also stipulates the need to increase the estimations of the costs of these materials by a certain margin to cater for aspects like wastage and delivery (Conti 2013).
Overheads
The firm becomes aware of the need to open accounts for charges related to expenses such as rents, office administration, and depreciation of machinery. Since such expenses do not directly relate to the task, an accountant who fully understands the job costing system will help in ensuring that the step is a projection, but not calculation (Kern & Formoso 2006).
- The Uses of Job Costing System for Decision-Making Managers in Construction and Professional Service Industries
The Importance of Job Costing to Managers in Construction Firms
Job costing makes use of costs that are documented to a definite contract to show every job’s profitability, which is then compared to the original estimates. Therefore, careful allocation of costs results in an exact estimation of profitability figures (Anta & Iacob 2013). In turn, this leads to almost precise feedback on present tasks and the exact estimation of future bids. Additionally, being aware of profitability is helpful to the management in the sense that managers will make out where projects went wrong or right. It is also possible for the management to rely on the job cost system to trace projects by types and stages, thereby being able to retrieve relevant data at every phase of a contract. For instance, if a company incurs losses due to a particular task that had all its costs properly coded, then managers can utilize such information in the future when making decisions (Butterfield 2016).
Additionally, there might be severe differences between profitability and projections for different reasons. For instance, the cost of materials can go up if there is a submitted bid or a unique skill that only a subcontractor must complete. If managers are in a position to recognize the failure of a task to go as planned, then they can fine-tune the approximation of figures on comparable jobs. Alternatively, they can locate a more cost-effective approach to deal with issues that might keep on arising in the future. Noteworthy is that it might be a serious challenge for the management to make such decisions if it does not utilize job costing accurately (Butterfield 2016).
The Importance of Job Costing to Managers in a Law Firm
The job costing system is helpful to the management of Clayton Utz law firm because managers can use it to track expenses to definite services. Importantly, it makes it possible for managers to build up expenses by tasks instead of departments/units and evaluate them accurately, while also allocating prices of services fittingly (Lepădatu 2016). Additionally, regarding profitability, the system gives managers the latitude to allocate costs discreetly to personal operations and compute the margin of profits that every task will be generating. In this manner, the manager is best suited to make decisions concerning the more profitable (Conti 2013).
Managers can also use the system to evaluate the performance of lawyers. Such is because the job costing system offers adequate information that managers require to assess performance data of individuals as regards cost-control, efficiency, and productivity (Anta & Iacob 2013). Thus, with the aid of the system, managers are well placed to identify lawyers who cannot meet the expectations of the firm concerning performance. Thereafter, the lawyers can be informed to work harder to meet performance expectations or be laid off if the routine persists. The use of the system also offers managers access to costs that the firm incurs per task. This offers managers the chance to confirm costs one after the other, identify services offered, and comprehend why they occurred. Based on the outcome, the management can then develop appropriate strategies to manage expenses better in similar scenarios (Conti 2013).
Part B
Arkell, D (2005) ‘The evolution of creation,’ Boeing Frontiers, Vol. 3, No. 10. Accessed at https://www.boeing.com/news/frontiers/archive/2005/march/mainfeature1.html
The Design and Implementation of the Costing System at Boeing
Boeing and its main suppliers, Hamilton Sundstrund and Goodrich Corporation, were used to duplicate several manufacturing and development efforts. The supplier would design and develop machines, send them to its laboratory or production site to test, test, and ship them to Boeing. Upon receipt, Boeing would also test and evaluate the machines in its laboratory. This meant that there was a duplication of expenses. As the airline firm continued to transform into a producer of big systems and components, it focused its attention on designing and implementing lean manufacturing principles that would help avoid such duplications (Arkell, 2005).
As the company diverted lots of its attention to integrating large systems and parts as well as offering total support for the life cycle, the supplier’s role had become very critical. This implies that the supplier was expected to take over accountability for being in charge of all aspects like raw materials, fabrication, essential certifications, assembly, oversight, and quality management. As such, an efficient and lean approach was critical in getting rid of wastes and optimising the supply chain. A good example of this approach is the management of inventory. This has prompted the company to implement lean approaches like internal kitting, point-of-use delivery, and just-in-time ordering to make its processes of production more efficient. In this regard, suppliers are expected to create and deliver parts using the just-in-time system (Arkell, 2005).
Additionally, the company makes use of a consumption-based ordering system that allows suppliers to aggregate order and demand at their discretion. In other words, they develop and ship only when the inventory level of the company falls under particular thresholds. Furthermore, the change in responsibility allows the suppliers and the company to set levels of inventory based on rates of consumption that are required to support manufacturing. Sequentially, this approach allows the company to reduce the number of warehouses at its production spots. Most importantly, the company can predict and enhance its cash flow (Arkell, 2005).
The Costing System in the Article Meets the Attributes Discussed in Section A (Q1)
The costing system in the article meets the attributes discussed in Section A (Q1). Just in the same way the job costing system considers a comprehensive breakdown of expenses for an initiative of any form, the point-of-use delivery and just-in-time ordering systems in the article perform almost the same task (Arkell, 2005). The systems are efficient and lean, and, as such, they play a critical role in getting rid of wastes and optimising the supply chain. Additionally, the job costing system is concerned with accumulating expenses by definite orders, contracts, and jobs. The consumption-based ordering system in the article also allows suppliers to aggregate order and demand at their discretion, meaning that they develop and ship only when the inventory level of the company falls under particular thresholds. Most importantly, the system enables the company to manage its warehouse effectively by ensuring that it only orders for additional stocks when it experiences a decline in the level of its inventory (Arkell, 2005). This means that the systems entail lots of bookkeeping, just like job costing.
The Extent to which Cost Information in the Article is Valuable to the Internal Users at Boeing
The warehouses of the company were all filled with inventory and raw materials in the past few years. This means that the staff in charge of stock-taking lacked a proper costing system that they could use to trace the materials. Nonetheless, it currently receives materials promptly at a definite assembly zone. The systems enable the staffs to order materials only when necessary, meaning that employees are aware of the exact number of inventory in the warehouses and whether it matches demand. Additionally, the company is in a position of correctly forecasting the needs of staffing, scheduling maintenance in a better way, and carrying out lean enhancements (Arkell, 2005).
The design and implementation of the new systems have also enabled the company’s personnel to place and track orders. This approach has made it possible for it to avoid instances of disappointing clients due to undue delays. Additionally, the systems have helped plan and produce at rates that are optimal for the company’s production system. For instance the consumption-based ordering system enabled the firm to minimize stock by in excess of $300 million in just one year (Arkell, 2005). This proves how valuable the systems are to the firm.
Noteworthy also is that cost information in the article has improved the rate of sharing information today. The systems place the management in the best position to share visions and projections both within and outside the firm since it facilitates conversing with colleagues and sharing ideas, rather than just telling managers what workers feel they should hear. The freedom that allows workers to speak their minds and share opinions and information helps the company to make advancements in the system of production. Of significant to note is that when a firm works concurrently with solid processes, understanding, and good communication, it does it once to reduce costs and achieve better output (Arkell, 2005).
Two Critical Lessons that would Inform Modern Companies about the Practical Application of Job Costing System
Accurate job costing results in appropriate estimation of the costs of materials to be utilized in a project and profits to be achieved. Such is because job costing makes use of costs that had been recorded in the past project to forecast the profitability of every task that is to be carried out. As such, it makes it possible to compare estimates with the profitability of past projects. Careful allocation of costs also results in the exact computation of profitability figures as long as the past projects are comparable to the future ones. In sequence, this approach results in definite responses on tasks that are currently being performed and precise estimations on future tasks. Markedly, being aware of the profitability of a task is useful to the company as a whole as managers learn why certain projects succeed while others fail to materialize. The system is also essential in tracing tasks by forms and stages, permitting the use of pertinent data wherever necessary as the contract progresses. This approach enables project managers to rely on past data when making decisions about projects with similarities with the past ones to avoid failures, thereby making profits. The job costing system also informs the management about the variances in profitability even if a past project was relied on as a case study. Such variances can be due to inflation, the need for a specialized subcontractor, and increased cost of materials and labour (Uyar 2010; Gurowka & Lawson 2007). Being aware of such variances will help the management to adjust estimations accordingly and ensure that a project is managed as of earlier planned, thereby avoiding failures. Hence, an accurate allocation of costs is very critical.
Additionally, the job costing system is important in assessing the performance of a firm’s workforce. The assessment is possible because the system offers plenty of information that is helpful to the management in evaluating a worker’s performance data concerning cost-control, efficiency, and output. Hence, the adoption of the system by a company puts the management in the right place to spot employees who always fail to meet the stated performance expectations. The use of the system also gives managers the freedom to allocate costs discreetly to personal operations and compute the profitability margin that every task is expected to generate. Thus, the use of the system empowers the management to make appropriate decisions.
Conclusion
The job costing system can dramatically improve the strategic making of decisions if it is well incorporated into the environment where decisions are made since it will offer the needed information. It is also essential because it makes use of data that relates to the costs of services or commodities that business purchases. As such, the job costing system considers a comprehensive breakdown of expenses for an initiative of any form. The system is also concerned with gathering costs by definite orders, contracts, and tasks. It also suits a company that produces identifiable products or produced as per the specifications of clients.
Additionally, the management can also use the system to evaluate the performance of employees. Such is because the job costing system offers adequate information that managers require to assess performance data of individuals as regards cost-control, efficiency, and productivity. Thus, with the aid of the system, the management is well placed to identify workers who cannot meet the firm’s expectations concerning performance. The system also offers the management the latitude to allocate costs discreetly to personal operations and compute the margin of profits that every task will generate (Kell & Shoemaker 2017). In this manner, the manager is best suited to make decisions concerning the operations that appear more profitable and disregard those that generate losses.